Dominant Currency Paradigm - An interesting progress in open economy macroeconomics after IS-LM-BoP
Does it matter if the exporters/importers of a country show preference for a certain currency while invoicing the trade? I had dabbled with this few years ago here , which was based on the Dominant Currency Paradigm presented by Gita Gopinath, Casas et.al. The expanded theory titled " Dominant Currency Paradigm " (DCP) was published at the AER in 2020 and the corresponding replication code with data is made available here . DCP is a significant development after Mundell-Fleming's model using IS/LM/BP curves which has been a workhorse model for decades. Mundell-Fleming (and the Devereux model) uses bilateral exchange rates to arrive at equilibrium rates, whereas DCP takes into account the additional factor that countries may use a third currency as invoicing currency while trading bilaterally. For example, traditional Mundell Fleming model for trade between India and Japan would use INR/Yen pair to understand disequilibrium whereas the actual invoicing of this trade may